THE DEVELOPMENT OF HUNGARIAN-SOVIET ECONOMIC RELATIONS

Author(s): S. RICHTER
Source: Acta Oeconomica , 1987, Vol. 38, No. 3/4 (1987), pp. 303-322
Published by: Akadémiai Kiadó

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 Acta Oeconomica, Vol. 38 (3-4), pp. 303-322 (1987)

THE DEVELOPMENT OF HUNGARIAN- SO VIET ECONOMIC

RELATIONS*

S. RICHTER

In the examination of the real processes in Hungarian-Soviet economic relations an

important role is played by the determination of the actual importance of this system of
relations. For this a manysided approach, the weighing of factors affecting the commod-
ity pattern of trade, exchange rate policy, the structure of production and many others,
are necessary. For an investigation of mutual advantages deriving from the bilateral
relations the balance data only provide limited help, for the weighing it is also necessary
to take into account the composition of exports and imports over time as well as the
particular valuation system developed within the CMEA. For illustration of unsolved
problems of the Hungarian-Soviet relations the author presents in detail the questions of
primary energy imports and those of agricultural and machinery exports.

The importance of Soviet economic relations

for Hungary

In Hungary's foreign economic relations, those with the Soviet Union are of
fundamental importance. This predominant role shows in various aspects: the Sovie
share in Hungarian foreign trade, the particularities of the commodity pattern, th
influences on the production and organizational structure of the Hungarian economy and
indirectly, the influences on Hungary's foreign economic relations with other countries.
Hungary's foreign economic relations can be divided into two large sections and
these are practically of the same weight. One consists of the relations with the OECD are
and the less developed countries, and the other of the CMEA relations. Although the two
sections are by no means hermetically separated, both have distinct characteristics of
their own. With the OECD area and with the less developed countries, Hungary's trade
settled in convertible currencies (some of the latter being under clearing procedure);

This article is the product of an international research project at the Economic Information
Unit, Hungary and the Vienna Institute for Comparative Economic Studies, Austria. Its title is "Th
economic relations of Austria, Finland, Yugoslavia and Hungary with the Soviet Union. A comparativ
analysis". The article is the first part of a study on Hungarian- Soviet economic relations. The secon
part of the study is published in this volume under the title "The mechanism of Hungarian- Soviet
economic relations", and is written by Margit Rácz.
We could make use of only scarce published data. Most publications on the topic cannot be
used for economic analysis. The ample and high quality CMEA research in Hungary avoids going into
the details of bilateral relations, for authors tend to write on Hungary's CMEA relations, instead. Th
explains why we have given exact citations only for numerical data, while at the end of the article th
reader will find the most important sources on Hungary's CMEA relations, Hungarian- Soviet relatio
included.

Acta Oeconomica 38, 1987

Akadémiai Kiadó, Budapest

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304 s. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

prices and terms of delivery are formed and develop according to the rules of the world
market. In trade with the CME A countries, prices follow world market prices with several
years' delay and accounts are settled, with few exceptions, in transferable roubles. The
transferable rouble is the common currency of the CMEA countries, and it is practically a
unit of account of separated bilateral relations - namely, it is not usable in other relations.
Because of the particularities of price formation and unit of account, in the bilateral
economic relations between the CMEA countries, the advantages to be gained from such
trade are manifest mostly on the aggregate level of bilateral relations, and more obviously
in physical rather than financial terms. During the last forty years, the commodity
patterns of Hungarian trade with the OECD countries compared with those with CMEA
countries have shown wide differences. The pattern of Hungarian exports to the OECD is
like that of a less developed country, whereas to the CMEA it is like that of a highly
industrialized economy.
Hungarian- Soviet economic cooperation is embedded in the Hungarian-CMEA
system of relations, and represents its central element. This set-up conforms with the
internal set-up of CMEA cooperation in general. Ever since the beginning of the CMEA,
bilateral relations between the small Eastern-European countries and the Soviet Union
have been the predominating elements of the cooperation, while the small countries'
bilateral relations among themselves have been, though not negligible, of secondary
importance only.
In the following, an attempt will be made at a statistical demonstration of the role
of Hungarian-Soviet, relations in the Hungarian economy and in Hungarian foreign trade.
Over the last fifteen years, the average Soviet share in Hungarian foreign trade
turnover has been about 30 percent in both exports and imports (see Table 1). With this
share, the Soviet Union has been Hungary's largest foreign trade partner throughout the
period. In second and third position come the FRG and the GDR: as trading partners
they have held these positions since 1971. Their share, taken together, amounts to not
more than about a half or, at the most, two-thirds of the Soviet share. In imports, the
Soviet share is the size of the total imports from West European countries, while in
exports it is the size of the total exports to the OECD area.
At this point, it is worth stopping for a moment. In Hungary's trade with the Soviet
Union (and with the other CMEA countries) the prices of various products differ widely
from those on the world market. Alongside this, the dollar parity of the transferable
rouble can be stated by different methods leading to different results, since the transfer-
able rouble is not convertible. During the last twenty years in Hungary, the forint value of
the rouble has always been lower than that of the dollar, whereas the official quotations
of the International Bank for Economic Cooperation (IBEC) - have always shown the
dollar to be lower than the rouble.*

* According to IBEC quotations, the value of $ I fluctuated between 0.6 and 0.9 of the value of
the transferable rouble between 1968 and 1986; whereas the Ft/? and Ft/ transferable rouble rates of
the National Bank of Hungary showed 31 to be fluctuating between 1.2 and 1.6 of the value of the
transferable rouble (henceforth to be abbreviated as Tr. Rbl.) (Statistical Yearbook of Hungary,
Monthly Bulletin of Statistics, Statistical Yearbook UNO).

Acta Oeconomica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 305

Table 1
The share of the Soviet Union and other trading partners
in Hungarian foreign trade between 1971 and 1985 (percent)

Yeai Soviet Union CMEA *Τ*™

CMEA countries*
countries* . , countries °ECD Others** Total
. , countries

IMPORT

1971 27.9 23.7 34.1 14.3 100.0

1975 28.6 23.7 31.4 17.2 100.0
1981 28.6 18.3 36.0 17.1 100.0
1985 30.0 19.3 38.5 12.2 100.0

EXPORT

1971 28.6 25.0 30.4 16.0 100.0

1975 33.0 24.6 26.0 16.4 100.0
1981 33.4 19.8 27.2 19.6 100.0
1985 33.6 18.7 30.8 16.9 100.0

♦The Soviet Union not included.

♦♦Other socialist and less developed countries.

Source: Computations relying on the computer data base of the Central Statistical Office, and of
the Statistical Yearbook 1985 of Hungary.

Notes: The distribution is given on the basis of values indicated in forint, converted by the
Central Statistical Office from the dollar or transferable rouble values at the prevailing exchange rate
of the National Bank of Hungary.

Now, if we do not take the "Hungarian" Rbl/$ parity as our starting-point but
instead accept the rates of the IBEC, the newly computed distribution of Hungarian
foreign trade shows a drastically changed picture. Kálmán Pécsfs computations - on the
basis of IBEC rates - have shown the Soviet share in Hungarian foreign trade turnover
during 1981-1983 to be not about 30 but 40 percent, while the share of the OECD
countries amounts to hardly more than half the Soviet share. Time series computed with
a similar method have shown that the Soviet share was smaller in 1970, being only 33-34
percent, but it has grown in the period since. However, the share of the OECD countries
has fallen by a third.
For the purpose of the present analysis, it is the quotation of the National Bank of
Hungary that is considered suitable, since this rate of exchange reflects (though fraught
with contradictions) the Relative prices" of the dollar and the transferable rouble,
respectively in the Hungarian economy. Yet for our analysis it is also important to
establish the fact that, as regards measuring the importance of the Soviet Union as a
trading partner, the share of about 30 percent is to be accepted as one of the inter-
prétable shares - to us, apparently, the most realistic one. The application of the rate

Acta Oeconomica 38, 1987

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 306 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

based on IBEC quotations for examination of the distribution of Hungarian foreign trade
by the different markets produces an interprétable and interesting result only in the case
of comparison with the distribution of the other CMEA countries' foreign trade. Accord-
ing to the IBEC Tr. Rbl/$ rate the share of the CMEA countries in Hungarian foreign
trade is not smaller than it is on average in the foreign trade of other CMEA countries,
which are usually considered to be traditionally more strongly oriented towards the
CMEA than Hungary.
The significance of the Soviet Union as a trading partner can be examined from
another aspect, relying on the product pattern. Since 1971, 2/3 to 3/4 of total Hungarian
primary energy imports have come from the Soviet Union. For the Hungarian economy,
Soviet deliveries of crude oil, gas, coke, and electric energy are crucially important. In the
early 1980s, approximately a third of total raw material (SITC 2) imports came from the
Soviet Union, although at an earlier date the Soviet share had been higher. Within this
group of products, Soviet supplies are highly significant in the field of raw phosphate,
cotton, sawnwood and iron ore. The Soviet share is much smaller in other commodity
groups of imports. A fifth of total Hungarian machinery imports comes from the Soviet
Union (in the 1970s it was a quarter). The Soviet share in the total imports of
semi-finished products (SITC 6) is approximately the same, but it is also decreasing. In all
other groups of the SITC nomenclature, the Soviet share is far below that of the
respective total imports. Soviet supplies are, therefore, rather asymmetrical: outstanding
in energy and raw materials, below average in machinery and semi-finished products, and
very low in products of the food processing and chemical industries and in consumer
goods.
Hungarian exports to the Soviet Union are less concentrated. The Soviet share in
total Hungarian machinery exports has shown a slight tendency of growth: at present it is
between 40-50 percent. In the group comprising agricultural products and food the
Soviet share grew steadily in the 1970s and is today nearing its share in engineering
products. About 4/10 of Hungarian exports of consumer articles go to the Soviet Union,
and one quarter of all exported chemical products. At the same time, industrial products
which are unprocessed or semi-finished, raw materials, and energy, are under-represented.
The high share of the Soviet Union in several commodity groups of Hungarian
exports and imports leads us to the conclusion that a high dependence has developed in
this bilateral relation. At first sight, the dependence related to imports and the depend-
ence related to exports seem to be of a different nature. Energy and raw materials are
mass products which may be procured from several markets. Taking into consideration,
of course, the important infrastructural and geographical conditions, the importer is free,
in principle, to form the proportions of its main purchasing markets. As for exports -
Hungarian manufactured goods - of which only a small part comes up to the quality,
packing, financial, servicing and other conditions of the OECD markets - find a market
for greater quantities only in the CMEA countries (among them on the Soviet market)
having standards similar to Hungary. Therefore, dependence that has developed in exports
may be changed much less by a decision aimed at diversification. On a closer examination
of the problem, however, it becomes clear that the dependence on imports is, at present,

Acta Oeconomica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 307

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308 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

based on the dependence on exports. As long as the Hungarian export supply is rela
less competitive on the markets where trade is settled in hard currency, the present
of import dependence remains an unalterable fact. Summing up: the reducti
dependence may begin by improving the world market competitiveness of Hunga
export supply in general, simultaneously with the improvement of the condition
export to the Soviet Union and the increasing of efficiency of the domestic econom
Yet another aspect of the significance of Hungarian- Soviet economic rel
shows in the impact of these relations on the production and organizational structu
the Hungarian economy. The Soviet Union is a country of more than 270 m
inhabitants; her imports are in the hands of a small number of foreign trade union
facts follow from this: it is easier for Soviet foreign trade officials to keep in contact
few big enterprises than with tens of thousands of small firms; second, Soviet im
orders, once made, are usually of extremely large volumes. Both facts have w
towards a situation in which, in the division of labour that has developed during the
years of cooperation, it is first of all the large-scale enterprises of Hungarian indust
have become oriented towards the Soviet market. These enterprises have mainly a
themselves to the quality, packing, servicing, delivery-scheduling, and controversy-s
requirements of the Soviet market. It is, therefore, not accidental that it is exactly
group of enterprises which finds it most difficult to make its products competitive
world market. The production pattern of Hungarian agriculture also shows the infl
of the rising total of the previous ten years' exports to the Soviet Union; the inc
production of mass produce such as grain and unprocessed meat is mainly due to th
for exports to the Soviet Union. On the traditional Western markets, Hungarian
culture can only achieve modest results through such products.
An examination of the significance of Hungarian -Soviet economic relations
the Hungarian economy, from several aspects, leads one to the conclusion tha
relations are important to such an extent that related developments may in them
exert a decisive influence on the further development of the Hungarian economy.

The question of equilibrium

In Hungarian-Soviet economic relations, as well as in the mutual relations of

other CMEA countries, the question of equilibrium is a problem of extreme comp
being difficult to grasp. The questions of trade balance, balance of payments, and
equilibrium of advantages to be gained from bilateral relations are almost inextrica
The figures for the balance of payments of Hungarian-Soviet trade are not m
public, so it is not possible to study separately changes in the trade balance and c
in the financial sphere. Trade data, however - which are public - contain such Hung
deliveries which embody the interests and instalments of earlier raised credits, prac

♦The recent extension of foreign trading rights to other organizations is an important

forward. However, it does not, for the time being, imply a change in orders of magnitude.

Acta Oeconomica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 309

of commodity credits, which are themselves in commodities. On the impor

credits appeared, some years ago, as Soviet exports without compensation. T
over data further show certain deliveries increasing the export and the
respectively. This is a part of the joint investment, and it can be considered
special kind of credit construction. Besides, certain financing items* of Hung
relations show up also in commodity trade, if the turnover in those items is
Trade statistics also include figures of exports and imports transacted outside
system, in convertible currency; in this trade there has been a considerable,
recent years, decreasing - surplus on the Hungarian side. Thus the data of T
an approximate balance of Hungarian- Soviet trade.
It follows from the above-said that the balance computed on the b
published data of trade turnover is not suitable for drawing conclusions - esp
regard to the exact balance conditions of Hungarian- Soviet trade and even le
the equilibrium of advantages** to be gained from this trade. The latter wou

Table 3
Hungarian- Soviet foreign trade balance
and coverage rate between 1971 and 1985

Coverage rate
Years / ™.anc® (export/import, F
/ (million $) F '
percent)

1971 - 98.4 84.3

1972 49.4 107.7
1973 74.3 109.1
1974 2.1 100.2
1975 - 49.6 96.8
1976 - 27.4 98.2
1977 - 21.4 98.8
1978 -266.5 88.0
1979 -317.0 87.6
1980 - 16.3 99.4
1981 299.2 111.5
1982 341.9 113.1
1983 317.2 113.1
1984 223.1 109.5
1985 401.0 116.2

Source: computations on the basis of the

the Central Statistical Office of Hunga
Note: Forint data have been converted into dollars on
the basis of trade conversion factors provided
by the Central Statistical Office of Hungary

♦Payments related to tourism, services, incidental costs of commodity trade, etc.

**As opposed to the trade accounted in convertible currencies, the advantages to be obtained
from trade in a closed clearing system are closely related to the balance ot trade.

Acta Oeconomica 38, 1987

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310 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

even if we were in a position to know the balance of trade computed for the clearing as
well as for the convertible currency trade, and even if the fragments of the credit sphere
showing in the export and import deliveries could be clearly separated.
The consideration of advantages, and efforts made at establishing an equilibrium,
are at least as characteristic of the various partial domains of the turnover, as of the global
trade. As a consequence of the clearing system, the unconvertible unit of account, price
conditions deviating from those of the world market, and because of manufactured goods
being of a lower technological standard than that required on the world market, a sphere
of "hard" and one of "soft" goods have formed in the mutual trade between CMEA
countries - included in this process is the trade between Hungary and the Soviet Union.
Hard goods are easy to sell on the world market, and/or are import priorities of the
partner country, whereas soft goods can practically be sold only on the CMEA market
and/or are not among the priorities on the list of import needs of the partner country.
Primary energies and raw materials, a few semi-finished goods, and lately also some of the
agricultural and processed food products are traditionally hard goods; whereas the soft
goods are in the sphere of manufactured products. The two spheres are not sharply
divided: certain articles are hard in one year but soft in another.
The partners try to establish an equilibrium of advantages in several stages: in the
course of discussions concerning (medium-term) plan coordination, in elaborating the
five-year trade agreements, in composing the yearly and, to a smaller extent, also in
drawing up the civil-law contracts, between the concerned enterprises. They try to do this
by laying down the "hard-soft" proportions, item by item as well as globally, in respect
of both parties' export supply and import need. In the Hungarian- Soviet clearing trade in
which the clearing becomes an inapt provider of an adequate framework for the endeav-
ours to equalize advantages. This is how, within Hungarian-Soviet trade, a part of
advantages. In the bargaining process aimed at establishing an equilibrium of advantages,
the subjects discussed are the maintenance or amendment of earlier developed soft-hard
proportions, additional quantities of traditionally traded goods, and the compensation of
products envisaged as future introductions in the mutual trade.
Situations may arise - mainly because of the deviations between world market and
CMEA market prices, or because of the impossibility of physical compensation - in
which the clearing becomes an inapt provider of an adequate framework for the endeav-
ours to equalize advantages. This is how, within Hungarian- Soviet trade, a part of
turnover accounted in convertible currency and zero-balance construction within the
clearing came into existence. It is also why, in several cases, the waiving of certain export
and import items took place. This, partly, explains the efforts made at joint investment.
The equilibrium of advantages is in close interaction with the commodity pattern of
trade, the trends of changes in it, the dynamics of trade, and the developments in that
sphere of credit which is closely connected with commodity trade. In the following, these
fields will be reviewed.

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 3 1 1

Structure of the trade turnover

Important changes took place in the composition of Hungarian imports from the
Soviet Union between 1971 and 1985. In 1971 a little more than a third of imports was
made up of industrial raw materials and energy and 60 percent of manufactured products;
this proportion had been reversed, as a result of gradual changes, by 1985. The increased
weight of unprocessed goods is, primarily, to be traced back to price effects - in
particular to the increased prices of energy. The share of energy trebled - at current
prices - between 1971 and 1985, exceeding 50 percent in 1984. According to Kálmán
Pécsi's computations (he set out from the statistical nomenclature of the CMEA), the share
of primary energies was 41.5 percent in 1983 at current prices, while only 28.4 percent at
1970 prices. The share of raw materials fell by more than a half at current prices, as is
made clear by the data of Table 4. Agricultural products were almost totally driven out.
Of the manufactured goods, semi-finished products and machines - earlier making up,
together, half of the imports - lost much of their weight. The share of chemicals grew
dynamically through the entire period, though their absolute share did not reach 10
percent even in 1985. Industrial consumer goods only made up a fragment of imports in
1971, but their share shrank to almost zero by the early 1980s.
During the last fifteen years, the commodity pattern of Hungarian imports from the
Soviet Union has grown less varied and has become polarized. The increased share of
energy - partly because of increased prices - is only one of the reasons. There are other
reasons, too: for example, the Soviet supply has shrank (agricultural products, a few
semi-finished products, transport vehicles). The Soviet supply of engineering products and
consumer goods and Hungarian import neeeds rarely match and, with some of the "hard"
products, the Hungarian compensation offered has not been acceptable to the Soviet
partner.
Hungarian exports to the Soviet Union comprise two major elements: manu-
factured goods and agricultural products. The share of the latter group has been growing
fast since 1974, the year when deliveries of large quantities of Hungarian grain and meat
started to be exported in the Hungarian- Soviet convertible currency trade. In the group
of manufactured goods, machines and transport vehicles predominate. These groups, with
their growing shares, made up, on average, 4/10 of the total Hungarian exports to the
Soviet Union throughout the entire period. Industrial consumer goods also have a high
share, although of a decelerating rate, similarly to that for semi-finished products. The
share of chemicals has stayed at about 10 percent.
Since the group of engineering products is a most important element of Hungarian
exports in general, it is worth investigating what share this group represents in Hungary's
other export markets.
The figures for Hungarian exports of engineering products - shown in the Table -
clearly reflect the dual character of the Hungarian economy. Exports to the Soviet Union,
the CMEA countries and - to a smaller extent - to the less developed countries mainly
consist of machines and equipment, whereas in exports to the advanced industrial

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312 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

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/íc/a O económica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 313

Table 5

The share of machines and transport vehicles (SITC 7) in Hungarian exports between
1971 and 1984

CM Ε A Less

Years fT°Vie
Union Union
: , , . . (the S.U. developed
included) , , . countries .

1971 39.2 38.7 31.8 5.9 27.3

1985 46.0 46.5 31.4 10.7 33.5

Source: The data base of the Central Statistica

Statistical Yearbook of Foreign Trade 1985.

countries this commodity group plays a s

specialization tendency and ambiguous compet

Dynamics

In Hungarian -Soviet trade accounted in

imports have tended to deviate in recent years
The retardation of the growth of trade, a
and import volumes can best be studied on th
data concerning Soviet economic relations are
the total turnover accounted in rouble. Since
garian trade with the smaller CMEA count
balanced, the different tendencies in the volum
(the Soviet Union included) and in the dynam
current prices may give, according to our as
of the volume dynamics of the Hungarian- Sov
The Table shows that already in the yea
exports was growing twice as fast as that of im
evident between the years 1980-1985 when
counted in rouble, the Hungarian export econ
in rouble by a third. In effect this meant, fo
deliveries to the Soviet market. Therefore, as
and willingness for additional deliveries on t
Hungarian liabilities because of the five-year
Hungarian exports, measured in physical term

♦Trade data at current prices with the Soviet Un

transferable rouble, convertible currency transaction

9 Acta Oeconomica 38, 1987

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314 s. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

Table 6
Changes in the volume and value of foreign trade turnover
accounted in rouble, and of the Soviet relation
between 1975-1980 and 1980-1985 (1975=100 and 1980=100)

Turnover accounted _
. . * Soviet _ relation
Years ln rouble* . . *
volume value volume value

IMPORTS

1980/1975 116.7 118.5 - 129.4

1985/1980 100.1 141.4 - 148.4

EXPORTS

1980/1975 130.2 119.1 - 127.7

1985/1980 133.9 167.1 - 173.5

Source: The relevant issues of the Statistical Yearbook of For-

eign Trade (of Hungary).
"'This category includes foreign trade with other CMEA coun-
tries in addition to that with the Soviet Union.

Credit relations

The history of Hungarian-Soviet credit relations has two clearly distinct phases. In
the years between 1946-1975 Hungary received credits from the Soviet Union, not of
high amounts, but nonetheless of importance because of their scheduling and conditions.
The repayment ended in 1975.
A new phase began in the mid-1970s with the starting of the so-called "joint
investment" procedure. As for its content, the "joint investment" represents a price
increase, and as for its form, it is credit granted to the Soviet Union by Hungary and
other East European countries. It manifests itself within a financial framework, but is
mainly embodied in physical deliveries, the repayment of which is also made by means of
goods: namely, additional energy and raw material deliveries.*
The so-called consolidation credits are even more closely related to the global
development of Hungarian- Soviet economic relations; the Soviet Union has been grant-
ing such credits from the mid-1970s to the East European countries - among them
Hungary - which have been struggling for a balanced turnover because of the sudden rise
of import prices. The amount and composition of these credits are not publicly known.
To sum up, increasingly different export and import patterns characterize the
bilateral trade relations between Hungary and the Soviet Union and within these the
composition of Hungarian imports has shifted towards the predominance of energy.

♦These credits granted to the Soviet Union indirectly increased Hungary's debts in convertible
currencies, since some of the Hungarian deliveries consisted of goods financed with Western credits.

Ac ia Oeconomica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 315

Three key fields of the bilateral relations

Hungarian efforts to counterbalance bilateral trade have led to continuously increas-

ing export volumes, while the volume of imports has stagnated. According to the system
of valuation which is peculiar to the CMEA, the advantages rrieasured by contrasting hard
and soft goods has shifted towards the Hungarian partner. However, if the situation is
viewed from outside this system, it can be seen that increasing the supply of extremely
dollar-import -intensive export commodities was in fact a serious trial of the capacity of
the Hungarian economy - for this process took place without any impulses being
received from the Soviet market to induce structural changes which might have led to a
modernization of the economy. On the contrary, they have encouraged the development
of the production of commodities that are not even expected to become competitive on
the world market.

In the following, three fields of Hungarian -Soviet economic relations will be

discussed. These alone are sufficiently important to determine the development of the
system of relations as a whole and, beside that, they illustrate most of the obstacles
standing in the way of any further development of cooperation. Thus such obstacles can
be more palpably demonstrated in this way than in an abstract manner.

The question of energy imports

During the fifteen years between 1970 and 1985, the world economic role of
primary energies, and especially of crude oil, changed radically. From an important
strategic article, oil grew to be, after the two price explosions, a product capable of
bringing about a thorough transformation of the earlier relations of the world economy,
with its price determining the long-term development course of national economies.
During this period, there was a gradual growth of Hungary's dependence - measured in
physical terms - on energy imports; within this process, the dependence on the Soviet
Union as an energy supplier also increased.
During the 1960s and especially in the 1970s, the infrastructure necessary for the
primary energy and electricity imports from the Soviet Union was developed and
constructted: the electric energy transmission line system, oil and gas pipelines and the
Kalus-Leninváros petroleum product line. During that period, one single project of major
importance was implemented with a view to achieving a geographical diversification of
the infrastructure: the "Adria" oil pipeline, which had been planned on the basis of the
"peace-time" oil prices and with regard to dynamically growing demand. This pipeline
was left unused for years.
The reaction of the Hungarian economy to the 1973 price explosion came relatively
late: the revaluation of energy as a production factor began quite late, on impulses which
had already become considerably softened. The second wave of price increases reached
Hungarian enterprises relatively faster, and the growth of overall energy consumption

9* Acta Oeconomica 38, 1987

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316 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

Table 8
Soviet share in Hungarian energy imports and consumption,
on the basis of physical units of measurement (1971-1985)

Share of Soviet imports in total

Denomination imports8 consumption

1971 1985 1971 1985

Petroleum 90 93 66 75
Gasoil 87 99 11 20
Fuel oil 95 33 8 8
Natural gas - 100 - 37
Electric energyb n.a. n.a. n.a. n.a.
Coal 17 28 1 4

Source: Computati
and Foreign Trade Y
Notes:
almport data include imports for domestic use and for reexport
as well.

^Although Hungary is a regular importer of Soviet electric en-

ergy, no public data are available about the conditions of these imports.

slowed down to a considerable extent - yet the energy-intensive production structure of

the Hungarian economy remained practically unaffected.
Therefore, on the consumption side, Hungarian dependence on Soviet energy
supply continued to grow and the sources were not sufficiently diversified from the
infrastructural side - instead, the one-sidedness of infrastructural dependence grew
further. No important changes took place in the production pattern which might have
enabled, by means of the reduction of per unit energy needs, a moderation of the
strategic importance of the primary energy imports. Also, no genuine attempt was made
to increase the quantity of goods saleable on Western markets, so that scope could be
created for the diversification of imports. Efforts to this latter effect, had there been any,
would have certainly been countered by the lower prices of primary energies (in
particular the price of oil) on the CMEA market in comparison with the then current
world market prices.
For the Soviet Union, primary energy exports (above all crude oil) have become by
far the most important source of convertible currency receipts during the last fifteen
years, In spite of fast increasing extraction costs and the lower rate of growth of the
volumes of crude oil produced, Soviet deliveries to the CMEA countries increased right up
until the late 1970s. From the early 1980s on, beginning with the stagnation of crude oil
production and then with the slow but later rapid decrease of oil price in the world
market, it became more and more difficult for the Soviet Union to preserve her income
from crude oil exports, and then to prevent its further decline. A change in her
distribution policy between convertible currency and transferable rouble clearing rela-
tions seemed not only expedient but necessary as well. The Soviet Union's primary

Acta Oeconomica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 317

economic interest lay obviously in redirecting trade towards sales against convertible
currencies - this being the maximum programme. Thus the way was left open to such
"second-best" solutions as a) keeping up the level of the clearing trade, with growth
taking place only against convertible currency, and b) a general hardening of the terms of
compensation within the clearing. Beyond primary economic interests, however, the
Soviet Union is strongly interested in seeing that the economic - and indirectly the
political - stability of the small European countries should not be jeopardized.
Although within the bilateral trade it seemed - until the end of 1985 - that the
main question concerned the extent of the Soviet Union's losses (see the increasing
amount of literature on implicit subventions), there is no question of Hungary having
earned some absolute or, in other words, some "net" advantage from this set-up. The
damage caused by late reaction to changing relative prices in the world economy arose in
the first place from the late introduction of energy -saving measures, wrong investment
decisions. Besides, in the case of persistently low oil prices, the Hungarian economy
gradually "returns" the price gains of earlier years, owing to the sliding price basis -
whereas the costs of the late adaptation are never recovered. The Soviet Union, of course,
cannot be made responsible for the late adjustment of the Hungarian economy. It can
only be stated here that the price gain realized in one partial field of the bilateral relation
- a price loss for the Soviet party also in a partial field - led to both positive and
negative consequences of identical magnitude with regard to the Hungarian economy.
From the late 1970s crude oil imports, in the framework of the clearing trade,
stagnated. The growth of oil imports was only possible through different convertible
currency transactions, or by means of "joint investment". Finally, in 1982, the oil
quantity laid down for the clearing trade was reduced.
Hungarian energy imports represent, therefore, a field of Hungarian -Soviet eco-
nomic relations which is characterized by unsolved problems, and in which under the
given circumstances, the further reduction of the one-sided or mutual advantages of the
cooperation should be hindered or slowed down.
On the Hungarian side, change can be brought about in no other way than making
efforts towards developing new general conditions. An important as well as a realistic
objective is that which opts for a radical transformation of the energy-intensive produc-
tion pattern and improvement of the "dollar-earning capacity" of the export branches. It
is a gradual preparation for a situation in which there are shrinking import opportunities
from the CMEA and, at the same time, the creation of the conditions for diversification
of imports by means of increasing export capacities. The present degree of dependence
could decrease considerably from the present level or even larger levels of Soviet primary
energy imports if, based on the solid financial position of the country, the diversification
of sources of procurement becomes mainly an infrastructural problem.

Acta Oeconomica 38, 1987

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318 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

The role of the engineering industry in exports

As has already been stated, the composition of exports and imports in Hunga
Soviet trade has become very different during the last fifteen years. The most imp
group of products in Hungarian exports of manufactured goods is composed of m
ery and transport vehicles. Nearly half of the Hungarian exports to the Soviet Un
consists of engineering products; 4/10 of total Hungarian machinery exports go t
Soviet Union. In the early 1970s, the value of Hungarian machinery exports to the
Union was less than 1.5 times as great as that of machinery imports from the So
Union; in the early 1980s the former was already more than twice as great as the lat
Hungary plays an important role in Soviet machinery imports. In 1985 her sha
Soviet imports of machines, equipment and transport vehicles amounted to 9.8 pe
This share was higher than the combined share of the U.S.A., Japan and the FRG
percent) - this is remarkable even if viewed from the specific angle of the comput
made on the basis of the IBEC dollar rate.*
As a consequence of the rising prices of primary energies, the role of Hungarian
machinery exports changed to a certain extent, since the latter were now more a form of
compensation for the primary energy imports and not the engineering imports. This is to
say that, to an increasing extent, Hungarian foreign trade supplied goods qualified as
"soft" under the specific system of values of the CMEA in exchange for imports of goods
qualified as "hard".
"Softness" of the engineering exports to the Soviet Union manifests itself, among
other things, in the price trends. The slow increase of prices is, of course, relative: it can
be interpreted in its relation to the rise in production costs on the one hand, and to the
improved performance of the engineering goods on the other. The consequence of this is
that in the increasing value of exports, it is increasing volumes that are more important.
As for prices, a peculiar trap situation has developed. The majority of the tradi-
tional engineering products are in the declining period of their life-cycle. They have
been for many years part of Hungarian exports, and even their prices are traditional and
thus difficult to change. The manufacturing enterprises can make their choice: either they
continue exporting their goods with the usual performance pattern, which means they
grow increasingly out-of-date and "soft", and consequently their prices can hardly be
raised; or they modernize their products by means of considerable inputs. In the latter
case, the buyers' attitude is not very adaptable: either they insist on the old product, or
they accept the product of higher quality (yet are unwilling to recognize this quality in
the price reflecting the producer's risen costs). To put it simply: the majority of the
products, if exported in unchanged form, lose their relative value; if they are modernized
and so exported, increased costs are greatly disproportionate to the possible growth of
prices. With a considerable part of the engineering products, the extension of the circle of
export items saleable on all markets (CMEA and the convertible currency relations) runs

♦Vniesniaia Toigovlia SSR 1985, p. 79.

Acta Oeconomica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 319

not only into the well-known obstacle that the products that can be sold in the Sovie
Union and in the other CMEA countries are not to be placed on convertible currency
markets. It also has a less known obstacle, which is that only a part of the engineerin
products competitive on the OECD markets can be exported as "hard" goods to t
Soviet Union and the other CMEA countries. Thus the bilaterally impenetrable w
separating the two markets makes it impossible for Hungarian industry to benefit fro
the different nature of the two major markets, i.e. to export to the less demanding Sov
and CMEA markets, while developing the mass production of up-to-date products wh
could then be introduced on the OECD markets at competitive prices. Conversely, it i
not possible for Hungarian industry to support some originally OECD oriented develo
ments by considerable volumes of exports to Soviet and CMEA markets.
Hungarian engineering exports are, indirectly, closely related to foreign trade wit
Western countries. Many of the semi-finished products, parts, and components used fo
the machines exported come from Western imports. The dollar import content of expo
goods (i.e. its percentage) does not represent a real bargaining power, i.e. the "hardne
of the goods is correlated to the dollar import content only in a small percentage of cas
This circumstance also, indirectly, hinders the raising of the technical standards of t
machines produced for export to the Soviet Union.
It is also characteristic of engineering exports to the Soviet Union and in general
the CMEA, that most of the goods exported - and imported - are finished produ
Innumerable resolutions and a lot of agreements concluded notwithstanding, industri
cooperation remains far below the level which could be certainly achieved in a mutua
engineering trade of such volume. The reason for this is that no "fine structure"
bilateral economic relations has developed. In other words, there has been no develop-
ment of enterprise-level cooperation under the impact of market impulses, with con
comitant close technological, financial connections and ownership ties. This situation
the direct consequence, partly, of the fact that in Hungary industrial cooperation is als
on a low level within the country: enterprises work with a strategy traditionally con
centrated on finished products. On the other hand, the nature of the bilateral negoti
tions, the subordinate role of the inter-enterprise relations, and the given characterist
of the internal mechanism of the Soviet economy do not work towards the evolvement
industrial cooperation, either.
It seems, in the final account and in the long run, that Hungarian engineerin
exports are, because of their compensatory role, an indispensable element of Hungari
exports to the Soviet Union. The technical standards of these products are, in most case
below world standards and, with the present conditions of bilateral trade, there is no
incentive to raise the standards by means of considerable additional inputs. Thus it is n
a realistic objective to make this sphere of products potentially marketable on the tw
major markets. It is extremely difficult to find the way out of this trap withi
reasonable time. Some progress could be made by means of a structural change orient
towards energy and raw material saving, for this could deflect Hungarian engineerin
exports to the Soviet Union from their forced path by reducing the import dependen
on the Soviet Union.

Acta O económica 38, 1987

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320 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS

The role of agricultural exports

Agricultural exports hold an exceptional position within the total of Hungar

exports to the Soviet Union. This is because Hungarian exports in convertible cur
trade with the Soviet Union practically contain nothing else beside agricultural pro
The surplus realized in convertible currency trade with the Soviet Union had, by th
1980s, become a balancing factor of outstanding importance in the total Hungarian
accounted in convertible currency.
Since the mid-1970s, when earlier Hungarian exports accounted within the clea
system were joined by deliveries accounted in convertible currency, the share of ag
tural and food industrial products in Hungarian exports to the Soviet Union has gr
between 1/5 and 1/3. Also, the geographical distribution of total Hungarian agric
exports has changed. Until the mid-1970s the Soviet share had been below 1/5 of
total exports, whereas by the mid-1980s it approached 50 percent. The most c
teristic items comprising exports to the Soviet Union are cattle and pigs for slau
beef and pork, cereals, tinned vegetable and fruit, slaughtered poultry, and apple
two major items of the convertible currency trade are meat and grain.
According to the original conception, the convertible currency trade - in wh
price formation is based on current world market prices - should have been o
balance. This means that Hungary would have bought mainly crude oil and oil deriv
from the Soviet Union, equivalent to her exports. Slowed-down Hungarian eco
growth, and the modest success achieved in reducing the growth of energy consum
enabled the Hungarian party to import relatively little crude oil and oil derivatives
the Soviet Union beside the quantitites bought within the clearing system. Even th
at a value increasingly below the value of Hungarian grain and meat exports outsi
clearing. The resulting convertible currency surplus played a highly important stab
role exactly in the years 1982-1984 - most critical from the aspect of prese
Hungary's solvency (this function of it has since diminished). In the short run, the
the institution of the convertible currency trade had, on the one side, a trade-cr
effect, since it drew such goods into the bilateral trade, the volume of which cou
have been increased within the traditional clearing system; on the other side, howev
on the Hungarian side, it also had a trade diverting effect. From the shrinking W
European markets, in which Hungarian agricultural exports have had centuri
traditions, a great part of the exports has been redirected to the Soviet market.
balance of the non-rouble trade with the Soviet Union, within the total Hun
non-rouble trade, has been filling the role of the "pointer of the balance". However
impossible for the Hungarian party to calculate, for how long this trade can be m
tained. Economic constraints on the Soviet side have become increasingly imp
Contrary to the early 1980s, when convertible currency income from Soviet oil e
achieved their highest point, giving way for convertible currency payments in the
some important items even in trade with CMEA partners declining oil-related conv
currency income since 1985 clearly have made the Soviet party more chary about im
against convertible currency.

Acta Oeconomica 38, 1987

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 S. RICHTER: HUNGARIAN-SOVIET ECONOMIC RELATIONS 321

lhe approximately ten-year old trade accounted in convertible currency has been
sufficient to start and to strengthen a few specialization processes in Hungarian agri-
culture. This covers the extension of large-scale grain production, and increased meat
production - primarily of partly processed meat. The Soviet Union presents the only
large export target for this trend of specialization, since in the world economy today
there is a surplus of grain and meat, and no change in this situation can be foreseen in the
immediate future. It seems that the traditionally Western-export-oriented Hungarian
agriculture makes a significant part of its output one-market-oriented from the foreign
trade aspect, and in such a way that no guarantee exists in the long run to ensure that
there will be convertible currency returns from these exports. However, a developmen
strategy oriented to a variety of goods and a variety of markets, and to products which
have been processed to a higher degree could gradually diminish the risk arising from th
possible ceasing of the convertible currency trade with the Soviet Union. Besides, it is
reasonable to maintain this convertible currency trade for as long as possible and as long
as it is supported by mutual interests - preferably accompanied by a gradual change in
the commodity pattern, in order that the share of unprocessed grain and meat should be
lowered, so the share of processed foods marketable elsewhere could be increased.
However, even with the commodity pattern as it is, it would be worth loosening up the
one-market orientation, and attempting diversification within the given limits in grain and
meat exports.

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BeHrepcKoro ToeapHoro φοΓ^ no^BepraeT BeHrepcKyio 3KOHOMHKy TJDKejioMy HcnwTaHHK), npHH
CTHMyjibi, AaeaeMbie cobctckhm pbiHKOM, He Bbi3bieaioT CTpyKTypHbix H3MeHeHHH, KOTopbie μογλη 6
npHBeCTH Κ MO^epHH3aUHH 3KOHOMHKH Β UeJIOM, ÓOJiee ΤΟΓΟ BMeCTO 3ΤΟΓΟ CTHMyjlHpOBaJlH pa3BH
<aa3Ke β nepcneKTHBe HeKOHKypeHTOcnocoÕHbix Ha mhpobom pbiHKe oojiacTeii.

Acta Oeconomica 38, 1987

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